paycheck protection program loan forgiveness june 11, 2020 · sba ppp numbers as of june 3, 2020...
TRANSCRIPT
Paycheck Protection Program
Loan Forgiveness
June 11, 2020
Diane E. Edelstein and Peggy Revay
Disclaimers
• This is an overview and not meant to capture all elements of the programs.
• The regulations are being added and amended every day.• As flaws are found in the law there may be amendments.• The information contained in this PowerPoint is provided
for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner.
• Presentation of the information in this webinar is not intended to create, and receipt does not constitute, a tax planner-client or financial-planner-client relationship.
3
Coronavirus Relief Legislation
• Phase 1 – Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020
• Phase 2 –Families First Coronavirus Response Act (FFCRA)
• Phase 3 – The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
Phase 4 - ???????
HEROES ACT- Health and Economic Recovery Omnibus Emergency Act
4
Laws vs Regulation
Laws, are the products of written statutes,
passed by either the U.S. Congress or state legislatures.
Regulations, are standards and rules
adopted by administrative agencies that govern how laws will be enforced.
5
Families First Coronavirus Response Act
FFCRA
6
FFCRA
• Two sides– Employee Rights
– Tax Credits for Employer (not available for government employers)
• Exceptions– for Health Care Providers (using their definition)
– U.S. Secretary of Labor has the authority to issue regulations exempting small business with fewer than 50 employees from portions of the Act
7
https://www.dol.gov/agencies/whd/posters
Coronavirus Aid, Relief and Economic Security (CARES) Act
9
CARES Act
• Signed into law -March 27, 2020
• The CARES Act is 854 pages long
– Interim rules are coming out every day
10
This Photo by Unknown Author is licensed under CC BY-NC-ND
Paycheck Protection Program & Loan Forgiveness
(PPP)
11
CARES ACT vs Guidance
CARES Act• PPP loan interest not to exceed 4%
and a max. term of 10 years
• Max. PPP loan amount is based on payroll costs incurred during the one-year period before the date on which the loan is made.
• CARES Act provides that the forgiveness amount cannot exceed the sum of the following costs incurred by the business in the 8-week period following the closing the loan: payroll costs; any mortgage interest, rent, or utility payment
12
Guidance• PPP loan an interest rate of 1% and
maturity of 2 years.
• Loan Application says “use the average monthly payroll for 2019.”
• SBA application requires the business to certify that, “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
Paycheck Protection Program (PPP) – Sec 1102
• Loan applications began:
– April 3rd for businesses and sole proprietorships
– April 10th for independent contractors and self-employed individuals
13
SBA PPP Numbers as of June 3, 2020
• PPP Loans: 4.5 million small business loans
• Total loan amount: $510.6 billion
• Average loan size overall: $113k
– 64.6% below $50k
– 79.2% below $100k
– 0.7 percent above $2 million
• Over $120 billion in PPP funding still available
14
Paycheck Protection Program (PPP) – Sec 1102
• Basic Eligibility
– Any business concern, 501(c)(3) non-profit, veterans' organization or Tribal business
– Not more than 500 employees
• Eligibility Details
– Self-employed and independent contractors are eligible
15
Paycheck Protection Program (PPP) – Sec 1102
• Payroll Costs Include
– Salary, wages, commissions
– Tips
– Paid Leave
– Healthcare payments
– Retirement benefit payments
16
Paycheck Protection Program (PPP) – Sec 1102
• Payroll Costs Do NOT include
– Compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period
– Qualified sick leave wages for which a credit was allowed under section 7001 of the FFCRA
– Qualified family wages for which a credit was allowed under section 7003 of FFCRA
17
Paycheck Protection Program (PPP) – Sec 1102
• Loan amount vs Forgiveness amount– These are two different calculations
– Anything not forgiven is a loan
• Up to 4% per law
• Was 1% on April 3rd over two years
18
Paycheck Protection Program (PPP) – Sec 1102
• Allowable use of covered loans– Payroll costs
– Payment of interest on any mortgage obligation
– Rent
– Utilities
– Interest on any debt obligations incurred before the covered period
19
Paycheck Protection Program (PPP) – Sec 1102
• Good Faith Certification Required– In operation on February 15, 2020 and had
employees
– The current uncertainty makes the loan necessary to support ongoing operations
– The funds will be used to retain workers and maintain payroll also to make mortgage payments, lease payments, and utility payments
20
Paycheck Protection Program (PPP) – FAQ
• Good Faith Certification Required– FAQ #46 Any borrower that, together with its
affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
21
Paycheck Protection Program Flexibility Act
• Recognition that fixes needed to PPP
–House vote May 28th on “Paycheck Protection Flexibility Act”
–Senate passed June 3rd
–President signed on June 5th
22
Deadlines
• Loan Application Deadline remains at June 30, 2020
• You have maximum of 10 months to make Application for Forgiveness (with new Act)
23
PPP Flexibility Act
• Key points – Existing borrowers have the option to extend the 8 week
period to 24 weeks– New borrowers have a 24-week period, expiring on Dec 31,
2020– The 75% payroll expenditure requirement is reduced to
60%– Currently it’s 75% for payroll or there’s a reduction in loan
forgiveness– Requires borrower to spend 60% on payroll or NONE will
be forgiven– Reminder – loan amount is based on 10 weeks of payroll–
24
PPP Flexibility Act
• Key points – FTE Reduction Safe Harbor rolled back from
June 30th to December 31st
–New exceptions for FTE Reduction calculation:• Could not rehire employees (Feb 15,2020)• Could not find qualified employees for unfiled positions• Unable to restore business activity to Feb 15, 2020 levels
due to COVID 19 related operating restrictions
25
PPP Flexibility Act
• Key points –New loans have a 5 year maturity
• Existing loans can be modified to a 5 year maturity if lender agrees
• Interest rate to remain at 1%• Loan payments deferred until SBA determines amount of
forgiveness– Had been a 6 month deferral
–Can now qualify for the deferral of employer’s share of payroll taxes
–Does not address tax deductibility of expenses
26
Impact– PPP Flexibility Act
1. Significantly increases ability to have loan fully forgiven
2. It will change forgiveness compliance.
3. Important discussion on changes and pending guidance•Keep informed•Acknowledge frustration will those who are far along based on current criteria
4. Potential opportunity for new applicants
27
PPP Loan forgiveness - 1106
• Earliest loans: 8 weeks ended first week of June
• Application for forgiveness issued on May 15th
• Interim Final Rules on forgiveness
• FAQs did not happen because PPP Flexibility Act was pending (now happened)
28
Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities
(May 22, 2020)
• SBA can review any loan for eligibility and forgiveness
• Banks will not be paid fee if a loan is found to be ineligible
• Timing:
•Lender has 60 days to review forgiveness application
•SBA then has 90 days to review
• Borrowers may be asked questions by lenders and SBA
•May appeal SBA decisions within 30 days
29
Interim Final Rule on Loan Forgiveness (May 22, 2020)
• Addresses numerous components of loan forgiveness application and process
• Consistent in many ways with the loan forgiveness application released on May 15th
• Loan Forgiveness Process– See previous slide
– If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount
– Remaining balance due on or before two-year maturity of the loan
30
Interim Final Rule on Loan Forgiveness (May 22, 2020)
Timing of payroll costs eligible for forgiveness
In general, payroll costs paid or incurred during the eight consecutive weeks (56 days) covered period are eligible for forgiveness.
Begins on the date of the disbursement of the loan or the Alternative Payroll Covered Period
Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.
Eligible payroll cost: Includes payroll costs paid and payroll costs incurred during the Covered Period or Alternative Payroll Covered Period.
Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness.
31
Interim Final Rule on Loan Forgiveness (May 22, 2020)
Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction
Payroll costs are generally incurred on the day the employee’s pay is earned (on the day the employee worked)
32
Interim Final Rule on Loan Forgiveness (May 22, 2020)
Payroll Costs can include hazard pay and bonuses (subject to $100k annualized limit or $15,835 for 8 weeks)
Can pay employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations
33
Interim Final Rule on Loan Forgiveness (May 22, 2020)
Caps on owner-employees, self-employed and general partner compensation• Lesser of 8/52 of 2019 compensation or $15,385• $15,385 per individual in total across all businesses• Owner-employees capped at 2019 cash compensation and employer retirement and health care
–No word yet on who is an owner employee–Does the $15,385 include retirement and healthcare?
• Schedule C filers capped at owner compensation replacement based on 2019 net profit• General partners capped at 2019 SE earnings* multiplied by 0.9235• No additional forgiveness is provided for retirement or health insurance for
self-employed and general partners, as such expenses are paid out of their net self-employment income
* SE earnings are reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties.
34
Example of Alternate Payroll Covered Period
• Covered period is June 1 – July 26
– First day of first payroll cycle that starts in the covered period is June 7.
– May elect an alternative payroll period that starts on June 7 and ends on August 1 (56 total days)
– Must be paid on or before the first regular payroll date occurring after August 1.
35
Interim Final Rule on Loan Forgiveness (May 22, 2020)
Nonpayroll Costs Eligible for Loan Forgiveness
• Interest payments on any business mortgage obligation on real or personal property
• Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
• Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.– No additional examples provided as to what is a utility, what is included in
transportation, whether cell phones count as telephone, etc.
• Paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.– May result in more than 56 days of expenses being eligible for forgiveness– But total eligible nonpayroll costs cannot exceed 25% of the total forgiveness
amount
36
Example of Nonpayroll Cost
• Costs incurred and/or paid to be eligible for forgiveness.
• Covered period is June 1 – July 26– Forgiveness for May and June electric bill (payed during
covered period in June and July)
– And can apply for forgiveness of prorate share of electric bill through July 26. (as long as it is paid on the next regular billing date)
Note: would be greater than 56 days/administrative convenience **Remember non payroll cap is 25% overall
37
Reduction to Loan Forgiveness Amount for FTE calculation
Reduction is exempt if
• Offered to rehire or restore the employee’s hours at the same salary or wages
• Offer was rejected
• Offer and rejection are documented
• State unemployment insurance office notified within 30 days– More info to come on SBA website
If an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction, count at same FTE level as before
No double impact on the FTE and wage reduction for same employee38
Reduction to Loan Forgiveness Amount for FTE calculation- Safe Harbor
• No reduction for FTE if total FTE as of June 30, 2020 is greater than or equal to FTE in the Borrower’s pay period inclusive of February 15, 2020.
39
What is FTE?
• Avg number of hours paid per week, divide by 40 (maximum is 1)
or
• Simplified method that assigns a 1 for employees who work 40 hours or more per week and .5 for employees who work fewer hours
40
Overview of Loan Forgiveness Application
• Instructions and definitions and forms (11pages)
• Calculation form (last step in the calculations)
• Certifications
• Schedule A
• Schedule A worksheet (need to complete Schedule A)
• Document requirements
– Retain for 6 years after loan is forgiven or paid
• Demographic information (optional)
41
Loan Forgiveness Application
42
AICPA Resource
SBA Paycheck Protection Program resources for CPAs
PPP loan forgiveness calculator (Excel)
43
PPP SCHEDULE A
PPP Schedule A
• Takes compensation from Schedule A Worksheets
• Records amount of Salary/Hourly Wage Reduction (if greater than 25% reduction)
• Calculates the FTE Equivalency Reduction
• Shows total amount paid to owner-employees/self-employed individual/general partners
44
PPP Schedule A Worksheet
45
PPP Schedule A Worksheet
46
Documents to Submit
• PPP Schedule A - Payroll
– Documentation verifying the eligible cash compensation and non-cash benefit payments
• Bank account statements or third-party payroll service providers reports
• Tax forms for periods that overlap with the Covered Period (or Alternative)
• Payment receipts, cancelled checks, or account statements of employer contributions to employee health insurance or retirement plans
47
Documents to Submit
• PPP Schedule A - FTE
– Documentation showing
• Average number of FTE employees on payroll per month employed by the Borrower (which option is the election of the Borrower):
– Between February 15, 2019 and June 30, 2019 or
– Between January 1, 2020 and February 29, 2020
– Seasonal employer exception – any consecutive 12 week period between May 1, 2019 and September 14, 2019
48
Documents to Submit
• Nonpayroll– Business mortgage interest payments; lender account
statements from February 2020 and covered period and one month after covered period
– Rent/Lease; lessor account statements from February 2020 and covered period and one month after covered period
– Business utility payments; copy of invoices from February 2020 and those paid during the Covered Period and receipts/cancelled checks or account statements
49
Documents to Maintain/Not Required to Submit
• PPP Schedule A Worksheet or its equivalent and the following:– Documentation supporting the listing of each
individual employee in Schedule (Table 1 and 2)
– Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule
– Documentation supporting FTE Reduction Safe Harbor
50
Resources
PPP Frequently Asked Questions FAQ
PPP Frequently Asked Questions for Faith-Based Organizations Participating in the PPP and EIDL
Paycheck Protection Program Loan Forgiveness Application and Instructions
On May 22nd, the SBA issued additional comments on the loan forgiveness process
On June 10th, the SBA issued Revisions to First Interim Final Rule
51
Delay in Employer Payroll Taxes
52
Delay in Payment of Employer Payroll Taxes – Sec 2302
• Payment of employer share of 6.2% payroll tax can be deferred for the period between the date of enactment and December 31, 2020
53
Delay in Payment of Employer Payroll Taxes – Sec 2302
• 50% of amount deferred due
December 31, 2021
• Remaining 50%, due December 31, 2022
• Self-employed individuals are allowed to delay 50% portion of SE Tax by “short paying” quarterly estimated tax payments
54
Delay in Payment of Employer Payroll Taxes – FAQ #4
Can an employer that has applied for and received a PPP loan that is not yet forgiven defer deposit and payment of the employer’s share of social security tax without incurring failure to deposit and failure to pay penalties?
Yes, through the date the lender issues a decision to forgive the loan
55
Other Issues
56
Financial Statement Presentation-NPO
• This is a loan
• If it is forgiven it becomes a grant
– Conditional grant/refundable advance
• CPEA (AICPA) and NACUBO are suggesting that conditions would be substantially met when qualifying PPP expenses occur
– If you have no reduction for FTE or wage reduction
57
Financial Statement Presentation - Business
Notes from CPEA (AICPA)
• This is a loan
• If it is forgiven it becomes a grant (Absence of guidance in for-profit world)
– FASB ASC 958-605 follow NPO accounting
– IAS 20 model on government assistance
– FASB ASC 470 debt model
– FASB ASC 450-30 gain contingency model
58
Revenue for tax purposes
The revenue is not taxable
On Thursday, April 30th the IRS issued a formal notice stating “no deduction is allowed under the Internal Revenue Code for expense that is otherwise deductible is the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act”
Note: this may change in HEROES Act59
Other Awards
• PPP loan forgiveness is based on specified expenditures only and economic uncertainty
–Fee for service funding
–Program funding
60
Document
• Document your thoughts at time of application for the loan
• Document your thoughts on bonuses, hazard pay….
• Document your thoughts on which expenses to use for forgiveness
• Document your thoughts at time of application for forgiveness
• Document inter-relation with other funding streams
Must retain information for 6 YEARS
61
Questions?
62
This Photo by Unknown Author is licensed under CC BY-NC-ND
Questions? Contact Me!
Pittsburgh | Harrisburg | Butler | State College | Erie | Lancasterwww.md-cpas.com 63
Diane E. Edelstein, CPA
Partner
Peggy Revay
Senior Manager